How can I make a loan to a friend work?
November 30, 2012 1:22 PM Subscribe
I'd like to loan someone some money (a few thousand dollars). A friend needs it to finish school, and they don't have any good, low-interest options. I don't mind losing the money and forgiving the loan if they fall into hardship, but it would be a financial blow that I want to avoid; making it a straight up gift from the getgo is not appealing.
Is it possible to have a bank or credit union draw up the loan and service it for a flat fee? Any other ways to make the whole thing impersonal, legal, and low-hassle for me, while keeping it forgiveable at my discretion without impacting my friend's credit?
Another thought: would a bank be likely to make a loan at a very low percentage interest were I to put up the entire amount as security, with the bank putting it in escrow and releasing it back to me in installments as payments are made?
Any experiences or possibilities along these lines would be welcome. I'm very interested in helping this person avoid having to borrow at high interest rates or putting it on a credit card.
Another thought: would a bank be likely to make a loan at a very low percentage interest were I to put up the entire amount as security, with the bank putting it in escrow and releasing it back to me in installments as payments are made?
Any experiences or possibilities along these lines would be welcome. I'm very interested in helping this person avoid having to borrow at high interest rates or putting it on a credit card.
Yeah tell your friend about Lending Club.
Lending friends and family money is only a good idea if you can assume that you will not get repaid and have no problem with not getting repaid.
A bank likely is not interested in helping you secure and administer a small loan of a couple of thousand dollars.3
posted by dfriedman at 1:38 PM on November 30, 2012
Lending friends and family money is only a good idea if you can assume that you will not get repaid and have no problem with not getting repaid.
A bank likely is not interested in helping you secure and administer a small loan of a couple of thousand dollars.3
posted by dfriedman at 1:38 PM on November 30, 2012
Call up your local title company and ask them if they know of any escrow services that can serve a small loan like this.
posted by Happydaz at 1:46 PM on November 30, 2012
posted by Happydaz at 1:46 PM on November 30, 2012
Response by poster: Lending Club's 6-9 percent interest rates for grade A and B loans seems high to me.
Those numbers make a lot of sense if you're trying to, say, pay off a high-interest 24% credit card bill with the money, but I'm really interested in helping this person out with something as close to zero percent interest as I can get.
Lending friends and family money is only a good idea if you can assume that you will not get repaid and have no problem with not getting repaid.
I don't mind if they can't pay me back; all will be forgiven without rancor. But I'm not so well off that I want to take that kind of hit if I don't have to.
posted by jsturgill at 1:46 PM on November 30, 2012
Those numbers make a lot of sense if you're trying to, say, pay off a high-interest 24% credit card bill with the money, but I'm really interested in helping this person out with something as close to zero percent interest as I can get.
Lending friends and family money is only a good idea if you can assume that you will not get repaid and have no problem with not getting repaid.
I don't mind if they can't pay me back; all will be forgiven without rancor. But I'm not so well off that I want to take that kind of hit if I don't have to.
posted by jsturgill at 1:46 PM on November 30, 2012
What about cosigning on the loan for them? They'd make payments to the bank, and you'd be on the hook for the cash if and only if they don't pay it back.
posted by empath at 1:48 PM on November 30, 2012
posted by empath at 1:48 PM on November 30, 2012
I'm unclear on why you couldn't just write up a very simple contract and have your friend repay you directly, say by check or Paypal. It would be legal and low-hassle. If in the future the situation changed and you needed to enforce the contract, you could go to small claims court, and any contract written in clear language would suffice - no need for hyperlegal writing (assuming you're in the US). If it would make it somehow more impersonal, you could set up a separate Paypal account to receive payment for that only.
posted by Mr.Know-it-some at 1:49 PM on November 30, 2012 [4 favorites]
posted by Mr.Know-it-some at 1:49 PM on November 30, 2012 [4 favorites]
Response by poster: What about cosigning on the loan for them? They'd make payments to the bank, and you'd be on the hook for the cash if and only if they don't pay it back.
I would rather front-load my commitment, so that I put the money up now and it goes away where I can't touch it. The idea being that I can afford it, and I won't get it back in the worst-case scenario, but if things go well and the loan is paid off, I will see the money again.
Cosigning forces me to keep the money in reserve myself for the worst-case contingency, which seems more fraught (what if we have a falling out in the future, what if my financial situation takes an unexpted nose dive and I'm suddenly called on to make payments on the loan, etc.).
I'm unclear on why you couldn't just write up a very simple contract and have your friend repay you directly, say by check or Paypal.
I would prefer to have everything handled by a third party who already has an invoicing and accounting process in place. If I'm taking payments myself, that means that at least once per month I have to track what I've been given and what is owed; it means I have to contact the person if they fall behind; it means the loan is that much closer to our personal relationship, which might prove toxic. If that is my only option, I'm much more likely to just give the money as a gift.
I'm hoping for a middle man that will divorce the money and everything related to it from the friendship, while also keeping the interest rate as close to zero as possible.
posted by jsturgill at 1:54 PM on November 30, 2012
I would rather front-load my commitment, so that I put the money up now and it goes away where I can't touch it. The idea being that I can afford it, and I won't get it back in the worst-case scenario, but if things go well and the loan is paid off, I will see the money again.
Cosigning forces me to keep the money in reserve myself for the worst-case contingency, which seems more fraught (what if we have a falling out in the future, what if my financial situation takes an unexpted nose dive and I'm suddenly called on to make payments on the loan, etc.).
I'm unclear on why you couldn't just write up a very simple contract and have your friend repay you directly, say by check or Paypal.
I would prefer to have everything handled by a third party who already has an invoicing and accounting process in place. If I'm taking payments myself, that means that at least once per month I have to track what I've been given and what is owed; it means I have to contact the person if they fall behind; it means the loan is that much closer to our personal relationship, which might prove toxic. If that is my only option, I'm much more likely to just give the money as a gift.
I'm hoping for a middle man that will divorce the money and everything related to it from the friendship, while also keeping the interest rate as close to zero as possible.
posted by jsturgill at 1:54 PM on November 30, 2012
Cosigning forces me to keep the money in reserve myself for the worst-case contingency, which seems more fraught (what if we have a falling out in the future, what if my financial situation takes an unexpted nose dive and I'm suddenly called on to make payments on the loan, etc.).
Then cosign and also put the money in a savings account or some other interest bearing account. If he pays everything back at the end then go on a vacation or something. If not, then no harm done.
posted by empath at 2:05 PM on November 30, 2012 [2 favorites]
Then cosign and also put the money in a savings account or some other interest bearing account. If he pays everything back at the end then go on a vacation or something. If not, then no harm done.
posted by empath at 2:05 PM on November 30, 2012 [2 favorites]
What a nice thing you are thinking about: helping a friend finish school!
But, I think you know the answer to this question and I doubt there is a service from a financial institution or some other trick which is going to solve your problem.
The only piece of information that we have about your friend is that s/he is right now enrolled in a school without being able to afford to finish.
What will you do when your friend makes another bad financial decision or has some bad luck? Graduates and can't find a job? What will you do when your friend wants to borrow more money from you or takes out a high interest loan from a financial institution and needs to pay this back before paying you back?
I would suggest to define an exact amount that you are happy to give your friend (20$, 200$, 500$, whatever it is) and give them exactly that amount as a present.
Please kiss any money given to a friend goodbye when it leaves your hand.
posted by jazh at 2:10 PM on November 30, 2012 [6 favorites]
But, I think you know the answer to this question and I doubt there is a service from a financial institution or some other trick which is going to solve your problem.
The only piece of information that we have about your friend is that s/he is right now enrolled in a school without being able to afford to finish.
What will you do when your friend makes another bad financial decision or has some bad luck? Graduates and can't find a job? What will you do when your friend wants to borrow more money from you or takes out a high interest loan from a financial institution and needs to pay this back before paying you back?
I would suggest to define an exact amount that you are happy to give your friend (20$, 200$, 500$, whatever it is) and give them exactly that amount as a present.
Please kiss any money given to a friend goodbye when it leaves your hand.
posted by jazh at 2:10 PM on November 30, 2012 [6 favorites]
You could ask someone who does freelance/contract bookkeeping (like for small businesses that don't do enough to have a bookkeeper on their payroll) to manage the loan for you. I'm not sure how much that would cost, though--maybe you can find a friend who does bookkeeping who'll do it as a favor to both of you.
posted by needs more cowbell at 2:29 PM on November 30, 2012
posted by needs more cowbell at 2:29 PM on November 30, 2012
Mr. Know-It has it, I think, except for the small claims part. The amount eligible for small claims court differs from state to state, so it may not be an option.
If you cosign a note, the bank controls the interest rate and the repayment terms. If you take a note, you control those things. Plain and simple. If you friend encounters financial difficulties, you have the choice of delaying repayment obligations until he gets back on his feet.
Any amount that you forgive is regarded as a gift. You can do that for up to $13,000 per year without any concern for gift tax considerations.
posted by megatherium at 2:37 PM on November 30, 2012
If you cosign a note, the bank controls the interest rate and the repayment terms. If you take a note, you control those things. Plain and simple. If you friend encounters financial difficulties, you have the choice of delaying repayment obligations until he gets back on his feet.
Any amount that you forgive is regarded as a gift. You can do that for up to $13,000 per year without any concern for gift tax considerations.
posted by megatherium at 2:37 PM on November 30, 2012
My first thought was to pay an accountant to service the loan for you, as needs more cowbell says. However then you need to figure out what they do if repayment falters, which also means it becomes more work for them, etc etc.
Then I wondered - Will the repayment start immediately or after a short time? If so, and if you're both willing to do business with Paypal, perhaps the simple thing to do is set up a Paypal subscription. https://www.paypal.com/pdn-recurring
It's not bulletproof - it doesn't take much to have a PP sub stop running (someone's cc expires or there's a funding issue etc). But if you think this person is PROBABLY going to pay and pay on time then this will let it just run till there's a problem.
The downside is the Paypal fees (and Paypal themselves, if you're of the not-insignificant number of people who have a problem with them). But the advantage is that this person can repay you by CC and have it just roll.
You'd just need to pick an interest rate and repayment term and punch it into an amortization calculator to get the monthly sub rate.
posted by phearlez at 2:40 PM on November 30, 2012
Then I wondered - Will the repayment start immediately or after a short time? If so, and if you're both willing to do business with Paypal, perhaps the simple thing to do is set up a Paypal subscription. https://www.paypal.com/pdn-recurring
It's not bulletproof - it doesn't take much to have a PP sub stop running (someone's cc expires or there's a funding issue etc). But if you think this person is PROBABLY going to pay and pay on time then this will let it just run till there's a problem.
The downside is the Paypal fees (and Paypal themselves, if you're of the not-insignificant number of people who have a problem with them). But the advantage is that this person can repay you by CC and have it just roll.
You'd just need to pick an interest rate and repayment term and punch it into an amortization calculator to get the monthly sub rate.
posted by phearlez at 2:40 PM on November 30, 2012
I don't mind losing the money and forgiving the loan if they fall into hardship, but it would be a financial blow that I want to avoid; making it a straight up gift from the getgo is not appealing.
I'm a credit's rights lawyer. This isn't really a legal question, but I do this stuff all day.
Another way of asking your question is, "I want to give a gift of money but I don't want it to be a gift." A straight-up gift is exactly what you are going to be doing because there is no difference between an unenforceable loan and a gift. As several others have said, if you "lend" money to family and friends, you are in fact giving them a gift. If they ever pay you back, consider it found money.
posted by Tanizaki at 3:09 PM on November 30, 2012 [7 favorites]
I'm a credit's rights lawyer. This isn't really a legal question, but I do this stuff all day.
Another way of asking your question is, "I want to give a gift of money but I don't want it to be a gift." A straight-up gift is exactly what you are going to be doing because there is no difference between an unenforceable loan and a gift. As several others have said, if you "lend" money to family and friends, you are in fact giving them a gift. If they ever pay you back, consider it found money.
posted by Tanizaki at 3:09 PM on November 30, 2012 [7 favorites]
So if you want some search terms, I think you're looking for loan servicing for direct (as opposed to crowdsourced) peer-to-peer lending.
Googling is a little tough because you wind up with all the crowdsourcing p2p lenders. A while ago I had heard of CircleLending, but it looks like they were bought out by Virgin Money which then closed down in the US. There's a related org that just does personal mortgage lending. Here are a couple of other options I know nothing about:
LendFriend
ZimpleMoney
Loan servicing isn't cheap - as you are realizing, setting aside the potential interpersonal issues, collecting on a loan is kind of a pain in the ass. The fees aren't super clear on those sites (which may be a warning sign), but I'd bet it'll seem pricey. I would also worry about the servicing company going out of business and making a bigger headache for you down the road. I agree with those above that co-signing and then making your own escrow account is probably the best bet.
posted by yarrow at 3:26 PM on November 30, 2012
Googling is a little tough because you wind up with all the crowdsourcing p2p lenders. A while ago I had heard of CircleLending, but it looks like they were bought out by Virgin Money which then closed down in the US. There's a related org that just does personal mortgage lending. Here are a couple of other options I know nothing about:
LendFriend
ZimpleMoney
Loan servicing isn't cheap - as you are realizing, setting aside the potential interpersonal issues, collecting on a loan is kind of a pain in the ass. The fees aren't super clear on those sites (which may be a warning sign), but I'd bet it'll seem pricey. I would also worry about the servicing company going out of business and making a bigger headache for you down the road. I agree with those above that co-signing and then making your own escrow account is probably the best bet.
posted by yarrow at 3:26 PM on November 30, 2012
Tanizaki has it. Either you can afford to gift your friend the money they need to finish school, or you can't. IMO, you're better off just giving them the money without any expectation of seeing it again. I did something similar for my younger sister, who was in the same position as your friend a few years back (trying to finish school) and I have never regretted it. She has never tried to pay me back but I seriously and honestly don't care...I am just glad she got her degree. The money isn't "gone", it went toward someone's education, and was therefore an investment in the future of someone I care about. The key is to figure out how much you can really and truly afford to give and give that much. If it feels like "taking a hit" you're probably considering too large an amount.
posted by aecorwin at 5:37 PM on November 30, 2012 [2 favorites]
posted by aecorwin at 5:37 PM on November 30, 2012 [2 favorites]
It sounds like your heart is in the right place but you don't feel 100%. Aecorwin says it. You want to do it or you don't. You can do it or you can't. It's okay if you can't, or if you don't feel comfortable doing it. If you can, that's fine too.
posted by manicure12 at 10:55 PM on November 30, 2012
posted by manicure12 at 10:55 PM on November 30, 2012
It sounds like perhaps you also have an interest in helping your friend exercise fiscal responsibility here--eg. not to just facilitate school, but to do so with the expectation that the loan will be paid back. (I say this because you do seem to want to leave the option of the friend's credit not being impacted, which suggests there's some doubt over whether or not the loan would be repaid.)
Do you perhaps have an acquaintance or family member who would serve as an intermediary in this case? Ideally someone who doesn't know the student you are supporting. It seems taking the "personal" out of this personal loan would be ideal.
Secondarily, I believe you could also engage a legal professional. But your cost may end up being as much as the cost of losing the loan, depending on how long the term is.
I wish I had friends like you!
posted by Kalatraz at 6:54 AM on December 1, 2012
Do you perhaps have an acquaintance or family member who would serve as an intermediary in this case? Ideally someone who doesn't know the student you are supporting. It seems taking the "personal" out of this personal loan would be ideal.
Secondarily, I believe you could also engage a legal professional. But your cost may end up being as much as the cost of losing the loan, depending on how long the term is.
I wish I had friends like you!
posted by Kalatraz at 6:54 AM on December 1, 2012
Maybe you can use wepay.com to set up a monthly billing plan for the repayment, and then put it on autopilot? It doesn't affect their credit, and let's you have more control over the process. Build the interest rate into the payment term (i.e., principal * interest = total due, lengthen payment term until you have the monthly payment you want).
posted by 3491again at 3:21 PM on December 1, 2012
posted by 3491again at 3:21 PM on December 1, 2012
Write a contract.
Honest people don't mind agreeing to a payment plan (whatever it is). People who don't believe they can hold to their promises, even subconsciously, don't like them.
I've been on both sides of contracts with friends. I'm still friends with all the signators.
Also: you MUST put in the contract a "punishment" that results from missing payments. $5 per month/complete sum payable on demand/10% annualized simple interest... something.
When they pay you back, they will feel awesome for having succeeded at a financial agreement. Even if they mess up a month or two.
If they blow it... well, you said your friendship wasn't on the line. That's best.
posted by IAmBroom at 6:35 PM on December 1, 2012 [1 favorite]
Honest people don't mind agreeing to a payment plan (whatever it is). People who don't believe they can hold to their promises, even subconsciously, don't like them.
I've been on both sides of contracts with friends. I'm still friends with all the signators.
Also: you MUST put in the contract a "punishment" that results from missing payments. $5 per month/complete sum payable on demand/10% annualized simple interest... something.
When they pay you back, they will feel awesome for having succeeded at a financial agreement. Even if they mess up a month or two.
If they blow it... well, you said your friendship wasn't on the line. That's best.
posted by IAmBroom at 6:35 PM on December 1, 2012 [1 favorite]
Response by poster: Thanks for the feedback. Services like LendFriend seem almost right. We'll see how things go.
posted by jsturgill at 10:48 AM on December 6, 2012
posted by jsturgill at 10:48 AM on December 6, 2012
Found this late, a couple thoughts:
If you want to go the informal route (which as others have said means you should consider the money gone and full repayment a pleasant possibility), and avoid PayPal fees, you could just open a bank account at wherever this friend banks and schedule a monthly transfer. (Although I'm not sure if you can easily automate those between accounts belonging to different depositors.) Or I suppose he could just hand you a pile of future-dated checks. However-many at a time as you agree upon....and if there's a problem he calls you and tells you to hold off for a while. (But, really, I'd want to have a contract at that point.)
posted by snuffleupagus at 9:40 AM on December 9, 2012
If you want to go the informal route (which as others have said means you should consider the money gone and full repayment a pleasant possibility), and avoid PayPal fees, you could just open a bank account at wherever this friend banks and schedule a monthly transfer. (Although I'm not sure if you can easily automate those between accounts belonging to different depositors.) Or I suppose he could just hand you a pile of future-dated checks. However-many at a time as you agree upon....and if there's a problem he calls you and tells you to hold off for a while. (But, really, I'd want to have a contract at that point.)
posted by snuffleupagus at 9:40 AM on December 9, 2012
This thread is closed to new comments.
They gauge your or your friend's financial risk and assign a grade and interest rate.
Meanwhile, yes, a bank might consider allowing you to collateralize a loan in full, but they'll still charge an absurd amount of interest, typically. I was trying to get a car loan from my bank when I was younger, entirely in my name. The bank told me my father could put up the full amount as collateral (thanks), or he could co-sign. We got them to capitulate without the insane collateral request, but still.
posted by disillusioned at 1:29 PM on November 30, 2012 [2 favorites]